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The Risks of Financial Institutions$
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Mark Carey and Rene M. Stulz

Print publication date: 2007

Print ISBN-13: 9780226092850

Published to Chicago Scholarship Online: February 2013

DOI: 10.7208/chicago/9780226092980.001.0001

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Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations

Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations

Chapter:
(p.603) 13 Default Risk Sharing between Banks and Markets: The Contribution of Collateralized Debt Obligations
Source:
The Risks of Financial Institutions
Author(s):

Günter Franke

Jan Pieter Krahnen

Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226092980.003.0014

This chapter presents evidence that European securitizations increase the systematic risk exposure of sponsoring banks. The default losses of the securitized portfolio largely remain on the books of the issuing bank. The risk of extreme unexpected losses is transferred from the bank to investors. The net impact of securitization on the bank's stock price is hard to predict. Many banks engaged in securitizations increase their exposure vis-à-vis the market return. The beta increase after securitizations is much stronger for repeat issuers. Thus, many banks use the risk reduction achieved through securitization to take new risks. The risk transfer obtained by securitization depends as much on the way the issue is tranched as on the allocation of these tranches to different groups of investors. Financial stability would be enhanced if banks would neither invest in the senior tranches nor retain them, but sell them to more remote investors.

Keywords:   systematic risk exposure, European securitizations, sponsoring banks, stock price, risk reduction, investors, senior tranches

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